There are two different types of Equity Release Schemes:
Lifetime mortgages can either take the form of;-
Lifetime Roll Up Mortgages
Under these schemes you keep full ownership of your property but you obtain a secured loan paid as either a lump sum or monthly income (or both) and you pay nothing back during your or the last survivor (if joint application) lifetime, or you finally give up owning a home whichever is the earlier.
The interest which would otherwise be payable per month is rolled up on the loan until the loan is finally repaid by your executors or family, when both the loan plus accumulated interest, are repaid from the sale proceeds hence the term Lifetime Mortgage. You or your representative selling the property still receive the balance between the sale price and the amount required to repay the loan.
The maximum amount you can borrow is a percentage of your home's value being dependent on your age or the youngest age in joint cases. The amount offered by different providers varies depending on your age (or youngest age if joint) and the amount of interest they charge. Typically schemes offer between 20%-25% at age 60 going up to 60%, if, at outset, the youngest is approximately 90. Lifetime mortgages are widely available from age 60, but several will allow you to take a scheme out providing the youngest one is at least 55.
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Flexible Drawdown Lifetime Schemes
This variation of a Lifetime Mortgage allows you to set up an agreed maximum facility for a specified period (based on age and house value) but initially take just as much as you need for immediate needs subject to a minimum (varies with providers) and take further money (up to the maximum agreed facility) when required.
This helps save the debt building up as fast, as interest is only charged on what is actually outstanding at any one time. One scheme will even allow voluntary repayment without penalty.
Advantages of Lifetime Mortgages
- Available to younger people (55/60) than other schemes such as reversion schemes were it is typically 65 or 70 if joint.
- Unlike ordinary mortgages you have no monthly repayments to make and the amount available doesn’t depend on your income.
- Money is given to you to decide how to spend or invest it.
- You retain full ownership of the property and therefore the right to remain living in your home as long as you want.
- If your property increases in value by more than the interest has rolled up, you (or your beneficiaries) will receive the benefit.
- Flexible schemes allow you to control how quickly the debt builds up.
- Your home cannot be repossessed even if the total amount of the loan plus the interest exceeds your property’s future value providing you have continued to maintain it and complied with the mortgage terms.
Disadvantages of Lifetime Mortgages
- You must repay any outstanding mortgage or secured loan you have outstanding from the proceeds of the release. This means the amount you receive could be insufficient for your other needs.
- If you start it whilst young and live a long time, the loan and interest may represent a significant percentage of your home's value, especially if property prices do not increase. However, should you not require the maximum amount available for your age/s we can now offer a protected equity release scheme that will guarantee that a certain minimum percentage (up to 50%) will always remain for you or your family.
- The loan and interest accumulated will reduce what your family inherit.
- As the interest is not received until you die, the interest rate is higher than ordinary mortgages
- If you take the maximum release whilst relatively young and spend all of the money released, you may not be able to borrow further money to provide for yourself later in life, unlike a partial Home Reversion Plan
- Lifetime Mortgages involve borrowing against your property, and may work out more expensive in the long term than downsizing to a smaller property, and may affect your entitlement to State benefits and grants.
This website refers to home reversion plans and lifetime mortgages. To understand the features and risks, ask for a personalised illustration.
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Interest Only Lifetime Mortgages
There are a few building societies and banks that are prepared to offer ordinary interest only mortgages to retired people, to allow them to release capital.
Interest only mortgages mean that you only repay the interest not the capital to the lender, therefore, the monthly repayments can be relatively affordable.
In keeping with specialist schemes the intention is that you do not repay the debt until you die or sell the property.
Providing you pay the interest each month, your debt remains the same, unlike other specialist schemes. The amount you can borrow under such schemes is based on your incomes including pensions, not your age or life expectancy.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Advantages of Interest Only Mortgages:
- Debt remains the same
- Amount available can be higher for younger people than roll up schemes, as not based on age.
- Short term fixed interest rates are lower than available under roll up schemes.
- Set up fees can be considerably lower.
- Can be particularly useful as a temporary alternative measure for people who would prefer a specialist scheme, but are currently too young to obtain any of the best specialist schemes. (Then once eligible a specialist scheme may be used to replace the mortgage thus stopping the need to make monthly repayments.)
Disadvantages of Interest Only Mortgages:
- You need to make monthly repayments for the lifetime of the mortgage - thus increasing your expenditure.
- If you fail to keep up the repayments your home could be repossessed.
- Although interest rates are currently low they may increase, unlike a specialist scheme where once taken the interest rate remains fixed or capped for life. Although, fixed rates are available they will only be fixed for between 2-5 years. Thereafter you would need to find a new fixed rate deal or the rate would revert to the standard rate, both of which could be considerably higher at the time, leading to increased repayments.
- If you wanted to move, the loan would be repaid at that time, which may leave insufficient money to buy a new property, you would then need to obtain a new mortgage. Lending or personal circumstances may change resulting in you finding it difficult if not impossible to raise sufficient new money at the time.
- Should you want the loan to continue once you retire, lenders may limit the amount available to a multiple of your pension income, which may not be sufficient for your needs.
- Mortgages established based on joint incomes, may become unmanageable on first death, possibly forcing you then into moving or taking a specialist equity release scheme.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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Home Income Plans
With this form of Lifetime mortgage you mortgage a percentage of your property to a provider who in return gives you an annuity (a regular income for the rest of your life based on your age and sex). Unlike a reversionary scheme you automatically have the interest on the loan deducted from the annuity payments each month. This way the loan doesn’t increase like a Lifetime Roll Up Mortgage.
Whilst this means that only the capital is repaid on sale of your house on death or long term care it means that the net income received from the annuity is reduced. Due to tax relief on mortgage payments no longer being available and the low rates offered on annuities you currently need to be 80-85 at the outset for these schemes to prove attractive.
Advantages of Home Income Plans
- Forced to buy an annuity, which is a safe way of providing an income.
- You may be able to take some lump sum in addition to the annuity.
- The older you are the higher the income.
- As interest is repaid automatically the reduction in the homes value is minimised.
Disadvantages of Home Income Plans
- You are committed to an annuity as a means of extra income, leaving you no choice of alternatives.
- You do not have the option of allowing the interest to build up, so the reduced annuity may not improve your financial circumstances greatly.
- Home Income Plans involve borrowing against your property and may work out more expensive in the long term than downsizing to a smaller property and may affect your entitlement to State benefits and grants.
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Home Reversion Plans
This type of scheme allows you to sell part or all of your property to a provider in return for either a lump sum or income and a lifetime right to remain living in your property. You can sell up to 100% of the value of your property but will only receive a heavily discounted sum of money which could be as low as 25% of the current market value. The provider discounts the amount of cash as compensation for the fact that it may have to wait many years before receiving their money back on your (or in the case of joint applications, - the last persons) death or move into long term care. When the house is eventually sold the lender receives his percentage of the sale price and not just the market price at the time the arrangement was agreed.
For example, lets say your house is currently worth £260,000. If you agree to sell 50% (equivalent to £130,000 based on current value) and because of your age you receive 40 percent, you will only receive £52,000. If the house is then sold after 15 years and is then worth £400,000, the lender collects 50% of this amount or £200,000.
The percentage you receive depends upon your age and sex - the older you are the more you will receive. Whilst under these schemes you sell the ownership, you are still responsible for the property and bills relating to it.
If you have retained a percentage of ownership when you (or in the case of joint applicants – the last survivor) die or need to move into care, you or your estate receives the full value of the share retained.
Advantages of Home Reversion Plans
- The cost of the loan is known at outset (the percentage sold) compared to lifetime mortgage type schemes where it depends on how long you live.
- You know in advance how much of the home you will leave to your family.
- Larger sums can be released than under a lifetime mortgage - important if you still have a large mortgage which you want to pay off.
- As the percentage sold is set at outset you are less affected by falling house prices than under Lifetime Mortgages.
- Unless you sell all of the home, you continue to benefit from any growth in value of the share you retain.
- Unless the maximum is taken at the outset, you should still be able to sell further percentages whenever required. This means that you should be able to raise further funds later to either improve your finances further, pay for care or even mitigate Inheritance Tax. Such further releases are unlikely under Lifetime Mortgages unless your home increases in value by more than the loan increases with the compounding of interest.
- You can still move.
Disadvantages of Home Reversion Plans
- You receive only a percentage of the market value for the share sold. This is especially marked the younger you are, often making it uneconomical for low value properties.
- If you or the last person dies relatively early the cost of the scheme in terms of equity given up may prove more costly than under a lifetime mortgage
- You lose ownership but are still responsible for the upkeep of the property.
- Reversion schemes are available from several different providers but details and terms vary. Apart from the amounts each company deducts converting your share into benefit, some schemes allow you to benefit from increase in property values while others do not. Some schemes will allow you to sell 100% of your properties, while others limit it to only 90%.
- Reversion schemes involve selling all or part of your home and may work out more expensive in the lnog term than downsizing to a smaller property and may affect your entitlement to State benefits and grants.
This is a home reversion scheme. To understand the features and risks ask for a personalised illustration.
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Which Scheme is Right For Me?
The answer will depend upon many factors, including:
- Whether you have dependents, which you want to leave money to - If not Reversion schemes where you can sell 100% of your home, will give you more money from the property than Lifetime Mortgages.
- Your attitude to risk regarding how much you want to leave your beneficiaries - Reversion Plans where you sell only a percentage of your home guarantees that no matter what happens to the value of your property in the future, the remaining percentage will always be available for your beneficiaries. This cannot be said for most Lifetime Mortgage schemes where technically the full value of the home can be used up if you live a long time and the value of property does not increase, or even falls. lifetime mortgage providers, who provide a protected equity release scheme that will allow you to protect up to 50% of your home's current value, but this will reduce the amount available to be released.
- How much you need to borrow - Lifetime Mortgage schemes may not provide sufficient money, larger sums are available under Reversion Plan providing you are willing to sell a considerable percentage of your home's ownership.
- Your Age / Youngest Age - Reversion plans are not generally available until the youngest applicant is 65 whereas Lifetime Mortgage plans are available from 55.
- Life expectancy - As a Reversion company's interest is charged upfront usually based on average life expectancies, if you (both of you in the case of joint plans) are unlikely to live a long time (or intend to sell the home shortly after taking the plan) you could loose out more under a Reversion Plan than a Lifetime Mortgage scheme where your beneficiaries would only be liable for the initial amount borrowed plus interest due during your lifetime.
- How much spare income you have each month - If you have considerable spare income each month and only want to release capital to spend, an ordinary interest only mortgage might be better as providing you pay the interest each month, the debt would not build up and the interest charged by the lender would be lower. Alternatively, if you didn't want the extra monthly expenditure a specialist Lifetime roll up Mortgage scheme might be better.
- Whether you currently receive or may be entitled to State Benefits or grants - As you may lose or affect your entitlement to State Benefits and grants any scheme should only be considered if the benefits gained, outweigh any reduction in state benefit or grant entitlement.
If you have any further questions about any of these schemes click here
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